Sector Report Brazil Agricultural Storage and Marketing Review
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ReportNo. 6928&BR SectorReport Brazil AgriculturalStorage and Marketing Review Public Disclosure Authorized March2,1989 BrazilAgriculture Operations Division (LAlAG) LatinAmerica and the CaribbeanRegion FOR OFFICIAL USE ONLY Public Disclosure Authorized H -N Public Disclosure Authorized Public Disclosure Authorized Documentof the WorldBank Thisdocumnnt has a restricteddistribution and may be used by recipients onlyin the performanceof theirofficial duties. Its contents may not otherwise bedisclosed without World Bank authorization. / i'- ! CURRENCYEQUIVALENTS CurrencyUnit 1 Novo Cruzado(NCz$) (after 1189) Cruzado (Cz$) (after2/86) Cruzeiro (Cr$) (prior to 2/86) AverageExchange Rates 1986 1987 19882 US$l = Cz$13.654 Cz$39.22; Cz$225.267 Cz$1 = US$0.073 US$0.025 US$0.004 QuarterlyExchange Rates IwaS 1906 ULS$ CU86.798 Ca$9.009 Cz$12.M C&81.840 Cs$13.40 Cz$14.20 Cdll *US0.14? US$0.111 1$00.0?9 U0.072 US$0.72 US.70 1W?s 1988 2 I iI Iln IV I It III IV US$1 * Cx$18.290 CA34.27 C1d47.31 CM0.0W C8291.68 CaS109.66 CZ29.8S Ca$468.93 CAI = UWSO.08 US$0.021 US$0.021 US$0.017 UM.011 US$0009 U50.004 US0.002 Weightsand Measures Metric US/BritishEquivalents 1 hectare (ha) 2.47 acres 1 kilometer(km) 0.62 miles 1 kilogram(kg) 2.20 pounds 1 liter 0.2642gallons 1 barrel 159 liters 1 bag 50 kilograms 1 ton 2,204 pounds Acronymsbegin on page 62 1/ The Braziliancurrency was changedfrom the cruzeiro(Cr$) to the cruzado(Cz$) in February1986, at the ratio of Cr$1000= Cz$l. On January16, 1989, the currencywas again changedto the novo cruzado (NCz$)at the ratio of Cz$1,000= NCz$l. All currencyreferences in this reportare in Cz$- 2/ Average January - November. 3/ January to November. FOR OFFICIL, USE ONLY BRA2IL AGRICULTURALSTORAGE AND MAP.UTING REVIEW Table of Contents Page No. List of Tables in Text ExecutiveSumeary ........... I............ .......... i - vii Resumo Ezecutivo . .....................................ix - xvii t. BRAZIL'SAGRICULTURE AND MARKETING SYSTEMS ..... 1......... A. Introduction. .. .. .......................................1 B. Brazil'sAgricultural Sector . ...........................2 C. GrainMarketing Systems .. * ..... .........................6 II. STORAGE INFRASTRUCTURE...... ..... .............8 III. PUBLIC SECTOR ROLE IN STORAGE .. .. 17 A. Introduction .... 17 B. Legal Fram_vork . .. C. Public SectorInstitutions ... 19 D. OfficialStorage Policy and Programs . 22 E. Issuesand Recovmendations....... F. SecurityStocks . 2 IV. ECONOMICAND FINANCIALISSUES . .............................31 A. Economicsof Stockholding............................... 31 B. Stock Financing.. .......................................37 C. StorageCosts and Returns to Invesbment . 40 D. StorageTariffs . .. 45 V . RELATED'4ARKETING ISSUES ... 48 A. Transport..... .... ... ......... 48 B. Classificationand Grading . 51 C. Market Information................................ ..... 52 SUI2MARYOF RECMO)ONDATIONS. 5 . 55 BIBLIOGRAP 9...... ACRONS ...... 62 GLOSSARY..... 66 STATISTICALAPPENDIX ... 68 ANNEXES: I. Projectionof StorageNeeds .89 II. The StorageSector . 105 III. Public Sector Involvementin Storage . .113 IV. SecurityStocks . .. 121 V. StorageInvestment and OperationsCosts . .126 MAPSt IBRD 20441 IBRD 20442 IBRD 20444 IBRD 20449 This docurnent has a restticteddistribution and maybe used by recipients onlyin the performance of their offlial duties. Its contents may not otherwise be disclosed without World Banlc authoriztion. BRAZIL AGRICULTURAL STORAGE AND MARKETING REVIEW List of Tables in Main Text Table 1.1 Structure of Crop Production, 1966-1986 1.2 Regional Importance of Crop Production, 1986 Table 2.1 Storage Capacity and Ownership, 1985/86 2.2 Storage Balance Sheet, 1984/85 2.3 Summary of Projected Static Storage Needs for all Commodities, 1992 2.4 Storage Ownership (1985) Table 3.1 Major Public Sector Institutionsin Storage 3.2 Government Goals for Grain Storage Expansion 3.3 Credit Lines for Storage Investments Table 4.1 RepresentativeStorage Construction Costs per Ton 4.2 Comparison of Cost Structure 4.3 Comparison of Storage Costs 4.4 Selected Storage Tariffs for Grains 4.5 CIBRAZEH Rate Increases Since 1979 -i- BRAZIL AGRICULTURALSTORAGE AND MARKETINGREVIEW EXECUTIVESUMMARY 1. In 1987 Brazilhad a recordharvest of 65 millionmt of grai:.sand oilseeds,an increaseof 201 over previous years. The bumperharvest was both a blessingand a curse,as Brazilfaced yet anotherstorage crisis and the Governmentwas forcedto purchase millions of tons of grain under its minimumprice program. The severityof the 1987 storagecrisis was directly causedby the sharp increasesin grain production.But the fact that there was a storageshortfall and that the Governmentintervened in agricultural markets- and that such shortfalls and interventionsocurLed regularly throughout the lact twenty years - had much to do with existing disincentivesfor Rtockholdingand storageinvestment, and with far-reaching public sectorinvolvement in storage,marketing, and pricing. 2. Brazilis the world's eighth largest economy, and a major world producerof grains,particularly soybeans and maize. Yet the full potential of its producersis constrainedby an underdevelopedmarketing system, lack of stock financing, and excessive Government interventions. Aside from disincentivesto production, the net impact of this situationhas been inefficientmarkets, eroding Brazil's competitivenessin world marketsas well as affectingdomestic food prices. 3. In responseto worsening shortages of storagefacilities and low privatestockholding, the Governmentof Brazilis seekingto increasepublic and private investment in storage, while expanding stock financing opportunities. To date, it has developed ambitious plans to increase investmentprimarily through credit programs. But effectivestorage policy must provideboth incentivesto hold stocks as well as incentivesto build warehouses. In fact,many of the benefitsassigned to buildingstores come from holdingstocks: market stabilization,added value of inventories,food security. 4. The purposeof this reportis to contributeto debateson marketing policiesin Brazil. The report containselements of storageand marketing policyto assistthe Governmentin providingthe frameworkand incentivesto modernizeBrazil's marketing and storage systems,while meetingGovernment concernsover market stability, food security, public expendituresand exportcompetitiveness. The key starting point is that the privatesector will not hold stocksand invest in storageunless incentives are adequate. The Government,by default,would increasinglybe responsiblefor stocksand storageservices. Yet this option would be more expensive,less efficient and less effectivethan expanding commercial marketing and storage. The reportconcentrates on basic foodgrains (maize, rice, beans,wheat and soybeans)because these figureimportantly in both the agriculturaleconomy and in recentstorage crises. - ii- StorageInfrastructure 5. Brazilsuffers from a shortage of storagefacilities. Brazil's storageinfrastructure in relationto production is far less than in many developedcountries. Total usable storage capacity is 60 millionmt, in contrastto total agriculturalproduction requiring storageof 76 million mt. While there is no magic numberrelating production to storageneeds, the aggregatestorage deficit is at least 10 millionmt and is projectedto reach some 50 millionmt by 1992 (assumingno new investmentin facilities and a continuationof current trade policies). These aggregatestorage needs could be reducedsomewhat if Brazilmodified its generallyrestrictive trade policiesfor major grains. These aggregate deficitfigures mask importantshortages of storage types (bag or bulk) and imbalancesamong regions. The southerr. states are the best-endowedwith storage infrastructure,but will require the most new investment as Brazil's marketingsystem increasingly moves towardbulk grainhandling. 6. On-farmstorage remains astoundingly low, accountingfor only 3X of capacity. Reasons for low levels of on-farm investment include:a) dependenceon off-farmprocessing facilities(for coffee,sugar, soybeans); b) limitedavailability of investmentand marketing credit; c) lack of incentivesfor holdingstocks; and d) highercosts relativeto cooperatives. The singlemost effectiveincentive for increasingproducer storag6 would be to expandcommercial stock financing (para. 20). In additionto lowerstock financingcosts, on-farm storage could increasinglybecone attractiveto cut down on transport and processing costs and to compensate for lack of commercial infrastructurein frontier area3. Expanded availabilityof investmentcredit would also be important. 7. Off-farmstorage investment has been discouragedby many of the same factorsaffecting on-farm investment, particularly limited availability of credit and lack of incentives for holding stocks (para. 15). In addition, competition from public companies has discouragedinvestment (para. 9), while volatile Government marketing policies increase uncertainty. PublicSector Role in Storage 8. A centralissue for the developmentof t.hestorage subsector in Brazilis the natureand extent of Governmentintervention in stockholding and storageactivities. The Government presentlyplays a major role,both directly (supplvingand using storage services) and more importantly, throughits polities (agriculturalpricing, interestrates, management of Governmentstocks, storage tariffs, subsidized credit, inflation and trade), which shapepatterns of stockholdingand storage investment,as well as market competition and efficiency. The net resul.tof Government